Fiscal year 2000, which ended in 31 March 2000 various CA officers and executives betrothed in a complete, company-wide practice of fallaciously and unfairly illegal recording and treatment within a financial quarter income related with assured authorize agreements although those authorize agreements had actually not been tied up and signed during that quarter. Within CA this practice was referred as the "35-day month" or the "three-day window," which violated GAAP rules and consequences in CA entering of immensely delusive financial statements. The fundamental target of the 35-day month practice was to grant CA to report that it met or exceeded its projected quarterly revenue and earnings when, in reality, they did not met its projected quarterly revenue and earnings. Consequently by practising 35 day months for numerous fiscal quarters CA reported falsely to their investors and regulators which include the four quarters of fiscal year 2000.in reality for each of the quarter for fiscal year 2000,CA inappropriately documented and fallaciously reported $100 million of revenue related with various license agreements that had been finalised after the quarter close.
In 2000-2001, Computer Associates, the third-largest independent software company in the world, was involved in a $2.2 billion accounting scandal. The president of computer associates Sanjay Kumar had wrongly reported more than $500 million in revenue in its financial year 1998 and 1999.Because of his action the stock price of CA has artificially inflated and the investors who bought the shares during that time earned losses. Besides this the accounting fraud of CA involves restating its financial results from 2000 and 2001 in April which reflects $2.2 billion in revenue which was improperly booked. (msnbc.com, 2004). During the investigation of CA case the three former executives of Computer Associates International Inc (CA) admitted that month they fraudulently recorded $100 of million worth of contract in a conspiracy to inflate quarterly earnings. They have pleaded guilty to securities fraud, as federal prosecutors continue to investigate the company. Referring to New York Times report Ira H. Zar, the former Chief Financial Officer, and Mr. David Kaplan and Mr. David Rivard, both former Vice-Presidents of finance at Computer Associates (CA) have entered their guilty plea. According to SEC during the company's fiscal year 2000 alone, Computer Associates "prematurely recognized" more than $1.4 billion in revenue from at least 116 contracts that had not yet been signed.
CA employees not only they falsely recorded revenue, but they also practiced "cleaning up" copies of backdated license agreements before they present copies of the agreements to their external auditors. This integrated removing facsimile stamps and other notations which confirmed the factual date on which the agreements were finalised. So that external auditors would see that the paperwork confirmed the company's claims. When the scandal took place the external auditors of CA Technologies was Earnest and Young. However after this lawsuit corporate scandal their external independent audit firm changed to KPMG. Executives of CA collectively determined the total revenue generated for each of the four quarter of fiscal year 2000 to meet their consensus estimates. Moreover, they also negotiate and finalise additional license agreements, which the agreements had been finalised after the end of the fiscal quarter. CA officers and executives concealed the existence of the practice from CA's outside auditors.
Diagram shows the four quarters of fiscal year 2000 improper revenue and share price details.
By the starts of 2002, the U.S Attorney's Office, Federal Bureau of Investigation and the SEC commence to investigate CA's accounting practices. This comprise of whether during the late-1990s and thenceforth, CA committed in any incongruous accounting practices with the aim to overstate its revenue .After the investigation SEC found that the format began in 1998, or perhaps earlier, and persistent all the way through September 2000. The company hastily recorded $3.3 billion in revenues from 363 software contracts which are against and violating Generally Accepted Accounting Principles, or GAAP (U.S Securities and Exchange Commission 2004) .According to GAAP it states revenues should be counted and record after both parties have properly signed a contract. From their further investigation SEC found that their target was to meet or beat per-share earnings estimates of Wall Street analysts, in order to maintain the company's stock price rising. From the entire quarters of 2000 most extreme incident was the second quarter, when the company reported $557 million in revenues beyond the $1.047 billion it could properly. Even in 2001 second quarter it shows a net profit and a loss which is quite puzzling. The document they release to the public it shows net loss of $291 million (The New York times, 2001) for the second quarter but its revenue rose from $1.442 billion to $1.397 compared to last year.
In February 2002, CA retained a law firm Government Investigations. Through the Company's Law Firm, CA represented to the United States Attorney's Office, the FBI and the SEC that it was committed to cooperating fully with the Government Investigations. Additionally, in a press release issued on February 20, 2002, CA denied that it had engaged in any improper accounting practices, declaring: "The reporting of our financial results has always been in accordance with applicable accounting principles."
In Computer Associates large segments of executives' compensation depend on meeting particular goals. The overstated figures in Computer Associates meant executives were compensated supplementary than they should have been. In CA the executives themselves are the big shareholders, and monopolise immense lumps of stock preferences. Hence they themselves had a big financial interest in the share price, and thus an inducement to amplify results earnings.
On February 22, 2002, CA Technologies has officially confirmed that it was conscious that both the SEC and the FBI Federal Bureau of Investigation (FBI), division of the U.S. Dept. of Justice charged with investigating all violations of federal laws except those assigned to some other federal agency. were inspecting the Company's accounting for civil, and in the case of the FBI, criminal violations. The announcement of this news which began to surface on February 20, caused investors to take off the stock, causing the share price to fell from a February 19 closing price of $25.31 to a February 22 close of $15.99, a drop of 36.8%.
The casualties in this case were the shareholders who trust the company was more lucrative than it was. They paid more than they should have for the stock, or kept in when, had they known the truth, they would have sold. These shareholders endure colossal losses once the practices were publicized. When the company stopped the practice at the end of the first quarter of 2001, it fell short of the Wall Street earnings estimate and the share price fell by more than 43% in a single day. Shares currently trade around $27, down from more than $71 early in 2000.During March they appoint two outside directors (The New York times, 2011) to its board regarding the removal of some of its executive members.
In April, 2004, in the face of a well publicized accounting scandal, Kumar stepped down as CEO, and in May, Kenneth Cron was nominated for the interim CEO. Subsequent John Swainson, an IBM veteran, was appointed as the CEO of Computer Associates after Sanjay Kumar resign in November 2004 . The charge against Sanjay Kumar was revealed after The Company has agreed to pay $225 million for the settlement to shareholders. There was another class of victims as well - employees. Late in September, the company said it would trim its workforce by 800 people, or 5%, in order to pay the $225 million settlement after the whole investigation of CA fraudulent case he was sentences in November 2006 to 12 years in prison for his role in committing a $2.2 billion accounting fraud at the computer software company. Along this CA Company itself have spend $30 million on its own investigation led by the former chief accountant for the SEC, and in responding to inquiries from regulators and prosecutors. Additionally with reference to New York Times on May 26, 2004 CA Inc offers $10 billion to settle a two years government investigation in to their accounting practices.CA Inc have said that the government haven't yet accepted nor rejected their offer. During April 2004 after they found in internal investigation that the sales were prematurely booked they restate its revenue for 2000 and 2001.However ,after all those investigation, CA Inc with hold in the software market by cost cutting and strong sales of security software which result for 2004 quarterly profits doubled. Their revenue rose to 9% which is $911 million (The New York times, 2011) compare to last quarter.
Recomendations
CA Technology suffers a corporate governance scandal when its CEO and head of sales admitted to a huge accounting fraud that took place between 1998 and 2000.Therefore organizations like CA Technology who is mostly involved in software business market they should need to implement a system which will enable them to keep track of their data. They should put in to place good records management system so that regulators would be able to find the information they needed. They should follow good corporate governance within the company and make the employees aware of this scandal. Also implement good ethical and cultural beliefs to maintain an honest environment.
